Government bonds are taking a beating.
Over the past three months, the yield on the U.S. 10-year Treasury has surged from 1.37% to 1.80%. It’s now at its highest level since June. (A bond's yield rises when its price falls.)
This has many investors worried…and not just in the U.S.
On Monday, the yield on the German 10-year hit a four-month high. Same with the British 10-year. According to Bloomberg Markets, government bonds had one of their worst selloffs in months.
Yields on 10-year notes rose to the highest since at least June in Australia and New Zealand on Tuesday, while those in Taiwan surged by the most in three years. The moves came a day after the yield on South Korean debt maturing in a decade reached the highest level since June.
• This is a major shift in investor thinking…
You see, government bonds are considered a safe-haven asset. Many investors buy bonds when they think stocks or other risky assets will do poorly.
After the Brexit, money poured into government bonds. Yields on many of these bonds hit multi-year lows. Some touched all-time lows.
With investors now fleeing government bonds, some analysts think the global economy could be taking a turn for the better. But that’s not why bonds tanked on Monday…
• Central bankers sounded the alarm on inflation…
The Wall Street Journal reported on Monday:
Bank of England Gov. Mark Carney said Friday that the BOE will tolerate a small overshoot of its inflation goal to prevent unemployment in the U.K. from rising sharply. Fed Chairwoman Janet Yellen said Friday that it is useful to consider the benefits of a “high-pressure economy,” interpreted by analysts as a sign that she is willing to accept inflation running a bit higher than the Fed’s 2% target.
Inflation measures how fast prices for everyday goods and services rise. When inflation is rising, the money in your wallet buys less stuff. In other words, inflation hurts the average Joe.
• Inflation is also bad for people who own bonds…
Let’s say you own a bond that pays a fixed annual interest rate of 3%. If there’s no inflation, your “real” return (your investment return minus the inflation rate) at the end of the year will be 3%.
Now, let’s say the inflation rate jumps to 2%. In this case, your real return would be 1%.
If the inflation rate hits 3%, your real return would be 0%.
In short, inflation eats away at bond returns. That’s why government bonds around the world sold off. The Wall Street Journal reported:
A sharp decline in global government-bond prices this fall shows mounting concern that central banks are growing more willing to tolerate inflation, a shift that many investors fear could expose bondholders to large losses in coming years.
There’s just one thing you need to understand…
• Central bankers don’t think about inflation like we do…
They see inflation as a good thing.
According to their models, prices rise when people buy more stuff. That’s why the Fed and the Bank of England are willing to tolerate higher inflation.
Casey Research founder Doug Casey says central bankers have it all wrong when it comes to inflation:
Inflation. This is one of the most misused words; few even think about its actual meaning. What is inflation? “Well, that’s prices going up.” No, it’s not. To say that is to confuse cause and effect. Inflation is an increase in the money supply. You inflate when the money supply is increased by more than real wealth increases.
• Central banks have been desperately trying to create inflation since the last financial crisis…
They’ve “printed” more than $12 trillion since 2008.
They’ve also cut interest rates more than 670 times over the last eight years. Global interest rates are now at the lowest level in 5,000 years…meaning money hasn’t been this cheap since the time of ancient Egypt.
Unfortunately, these “stimulus” measures have done nothing for the “real” economy. The U.S., Europe, Japan, and China are all growing at their slowest rates in decades.
These measures didn’t produce inflation either, at least according to official government measures.
Take the U.S. Consumer Price Index. It’s running at about 1.5% right now. That’s well below its historic average of 3.3%.
Inflation in Europe and Japan is even lower…
• Of course, Dispatch readers know the Fed massively inflated stock prices…
Just look at the S&P 500. It’s more than tripled in value since March 2009. A few weeks ago, it hit a new all-time high.
Keep in mind U.S. stocks have soared, even though the economy is growing at its slowest pace since World War II.
For years, the stock market was one of the only places you could find inflation. But that’s starting to change.
• Commodity prices have taken off this year…
Commodities are real assets, meaning they have tangible value. Because of this, commodities become more “expensive” when paper currencies lose their value. This is why higher commodity prices often signal rising inflation.
Now, if you’ve been reading the Dispatch, you know commodity prices have been falling since 2011. It wasn’t until earlier this year that commodities changed course.
You can see what we mean in the chart below. This chart shows the performance of the Bloomberg Commodity Index (BCOM), which tracks 22 different commodities, since 2011.
The index is up 11% since the start of the year. And some individual commodities have done even better. Sugar is up 42% on the year. Silver is up 26%. Oil is up 24%.
This could be an early sign that inflation is finally seeping into the real economy…
• Rising inflation is starting to show up in official government measures, too…
Reuters reported yesterday:
The Labor Department said on Tuesday its Consumer Price Index increased 0.3 percent last month after rising 0.2 percent in August. In the 12 months through September, the CPI accelerated 1.5 percent, the biggest year-on-year increase since October 2014. The CPI rose 1.1 percent in the year to August.
China’s Producer Price Index notched its first positive reading since 2012 on Friday. Meanwhile, consumer prices in England are rising at the fastest rate since 2014.
• Longtime Casey readers knew inflation would eventually pick up…
After all, inflation is just another name for money printing. And that’s all central bankers have been doing for the past eight years.
According to Doug, this reckless money-printing experiment has set the stage for a major crisis:
In a desperate attempt to stave off a day of financial reckoning during the 2008 financial crisis, global central banks began printing trillions of new currency units. The printing continues to this day. And it’s not just the Federal Reserve that’s doing it: it’s just the leader of the pack. The U.S., Japan, Europe, China…all major central banks are participating in the biggest increase in global monetary units in history.
These reckless policies have produced not just billions, but trillions in malinvestment that will inevitably be liquidated. This will lead us to an economic disaster that will in many ways dwarf the Great Depression of 1929–1946. Paper currencies will fall apart, as they have many times throughout history.
• If inflation keeps climbing, investors from Tokyo to New York will change how they allocate their money…
Paper assets like government bonds could crash. Real assets could soar…and gold could be the biggest winner of all.
You see, gold is real money. It’s held its value for thousands of years, even through the worst financial crises in history.
It’s also the ultimate safe-haven asset. Investors buy it when they think stocks, bonds, or the economy might struggle.
Finally, gold doesn’t need a strong economy to do well. You can’t say the same thing about most commodities.
• To be clear, it could be a while before we see runaway inflation…
We could even see a “deflationary spiral” before paper currencies inevitably collapse.
But that doesn’t mean you should wait to buy gold…
Remember, gold is much more than an inflation hedge. It could do well if the global economy gets worse or if investors get nervous about stocks or bonds. In other words, gold doesn’t need inflation to take off.
Gold could even skyrocket sooner than most people think…
This law will give 1.6 billion people complete access to the gold market for the first time since the 1970s. And that could blow the floodgates of the global gold market wide open. According to Standard & Poor’s, an estimated $3 trillion could pour into a tiny corner of the industry.
Almost no one is talking about this. The mainstream media has barely covered this incredible story.
And that’s exactly why you should care about it. You see, most investors wait until exciting stories become front-page news to invest in them. By then, smart investors have already made big returns.
To help you take advantage of this opportunity, we put together a new presentation. This video tells you everything you need to know about this event…including the best way to profit from it.
Chart of the Day
There’s never been a better time to own real assets…
Today’s chart comes from MarketWatch. It compares the price of real assets with financial assets. The lower the ratio, the cheaper real assets are compared to financial assets.
You can see that this key ratio is at an all-time low. This means real assets like commodities, real estate, and collectibles have never been cheaper relative to stocks and bonds.
According to Bank of America, this has created a great buying opportunity for real assets. MarketWatch reported on Monday:
The best approach? “Buy humiliation, sell hubris,” said Michael Hartnett, chief investment strategist at Bank of America.
He predicted inflationary pressure will build as central banks begin to scale back policy support. Ahead of that reversal, investors should rotate out of stocks and bonds to “real” assets, given their positive correlation with inflation.
“Today the humiliation is very clearly commodities, while the hubris resides in fixed-income markets,” Hartnett said.
We agree that real assets are dirt cheap. But we also have big concerns about the global economy. If you share our concern, we encourage you to own gold. It’s one of the only assets that do well no matter what happens to the economy.
Delray Beach, Florida
October 19, 2016
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